IRS Commissioner Charles Rettig infamously testified before Congress in April of this year that the estimated tax gap - meaning the difference between taxes due and owing by U.S. taxpayers each year and the taxes actually reported as due and collected - could be as much as $1 trillion each year. According to Senator Ron Wyden D-Ore, “cheating by those at the top” is the primary reason for this incredibly large tax gap. How do those “at the top” manage to get away with this? Because the IRS is “completely outgunned” and the wealthiest taxpayers are able to obfuscate their income by using opaque income structures and hide income through partnerships and other complicated structures, says Wyden. To address this problem, the Biden Administration and Senators Wyden and Elizabeth Warren D-Mass are proposing a requirement for banks to report the total amount deposited and the total amount withdrawn in a domestic bank account over the course of a year.
How would the plan work?
The proposal is significantly reduced from the initial plan, which contemplated straight reporting of the total amount of funds deposited and withdrawn from domestic bank accounts for all amounts in excess of $600. The new version of the bank reporting plan, according to a Treasury Department Fact Sheet, would exclude wage earners and federal program beneficiaries, such as Social Security Recipients, from automatic reporting and would only require reporting in excess of $10,000.
Senator Wyden said today that for wage earners who do not have an excess of $10,000 coming into their bank accounts, there would be no additional reporting. He correctly pointed out that banks are already required to complete information reporting to the IRS, reporting any interest over $10 earned to the IRS and providing a copy of that same form to taxpayers. Accordingly, he argued, adding account inputs and withdrawal totals for a year should not create an undue administrative burden on banks.
Benefits of the Plan
Senator Warren referenced testimony on Tuesday by deputy Treasury secretary Wally Adeymo, who estimated that the wealthiest 1 percent of taxpayers will fail to pay over $2 trillion in taxes that they owe over the next 10 years, when arguing that the proposed plan will make a significant positive impact on reducing the tax gap. As a tax controversy and litigation attorney, I can guarantee that if banks are required to report total inputs and withdrawals over $10,000 there will be two significant, positive impacts on the tax gap:
- Deterrent - Individuals and business owners who would otherwise be tempted to underreport their income simply will not. Taxpayers who know that the IRS will see just how much was deposited into a bank account are far less likely to lie about total gross receipts. This is the best outcome possible, because it costs money for the bank to comply with the reporting requirement, but doesn’t cost taxpayers a penny more in IRS enforcement. The reporting requirement alone would deter tax evasion.
- Enforcement - Taxpayers who for some reason don’t get the memo that the IRS will be receiving total inputs and withdrawals will still underreport their income, but it will be much easier for the IRS to identify them. The IRS already routinely examines taxpayers and makes adjustments to income reported based on the amount of deposits in a bank account versus gross receipts or income actually reported on a tax return. But the IRS must issue an Information Document Request, or summons, to get the bank account information. By requiring banks to affirmatively report this information to the IRS, Congress would assist the IRS in creating a low-cost way to identify taxpayers who should be selected for examination.
Problems with the Proposal
While Senator Wyden claimed that Democrats have worked to address the scenario where taxpayers have saved for a large purchase, such as a home, by exempting anyone who does not receive more than $10,000 in excess of W-2 wages from the reporting requirement, neither the fact sheet nor the explanations given on Tuesday address this problem in practice.
In addition, while under-reporting income, such as gross receipts, would be reduced through an information reporting regime that requires banks to report inputs and withdrawals, it will be no means eliminate the tax gap or the sophisticated means by which many of the wealthiest Americans seek to reduce or eliminate their taxes. So while it is true that this proposal would make a positive impact on the tax gap, it is unclear by just how much.
Putting it all together
Imagine John and Suzy, who are both wage earners, are saving for their dream home and are putting funds into the “dream home” account. When they are ready to make a down payment, they transfer $60,000 they have been saving over the course of two years from wages and from gifts, holidays, etc. to their joint checking account. Under the current proposal as explained on Tuesday, the input of $60,000 would trigger information reporting by the bank. Now, it is also possible that John and Suzy have been saving for their home by skimming money from Suzy’s job, or perhaps John is taking bribes, and the information reporting would alert the IRS to actual under reporting of income. It is worth considering whether as taxpayers we would prefer to have a “check box” election, alerting the IRS to a “large purchase,” endure an IRS examination that would likely be quickly resolved by telling an examiner about the savings for the large purchase, or allow taxpayers like John and Suzy to get away with cheating if they are in fact skimming, to protect everyone’s privacy.
The point is, the John and Suzy who are diligently - and legitimately - saving for a new home are out there, and have real privacy concerns. But the John and Suzy who are skimming and not paying taxes are also out there. And for every dollar that they don’t pay, it is costing the rest of the United States taxpayers. Our tax system is built on voluntary compliance and the idea that everyone must pay their fair share. When tax cheats get away with cheating, it erodes everyone’s faith in the system.
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Biden’s Bank Reporting Regime Would Help Close Tax Gap, But At What Cost? - Forbes
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